Spain entered in recession last month for the second time in three years. This country has been economically struggling since the 2008 financial crisis. The harsh austerity policies passed by the conservative government have not tackled the two main economy troubles of the country: The high unemployment rate and the very damaged financial sector. Therefore analysts are not very optimistic about the future of the Spain´s economy. In fact, the IMF expects the Spanish economy to shrink by 1.7% during this year.

Consequently, the Madrid Stock Exchange has continuously fallen since July 2011. Have a look at this graph.

However, some European countries economies have grown in the last two years or have recovered somehow after the 2008 financial crisis. For example Germany.

But why does the German economy increase while the Spanish hits the bottom? Let’s have a look at the companies that make up the DAX 30 and the IBEX 35 indexes in Frankfurt and Madrid Stock Exchanges respectively.

This is Germany

Among the 30 most important companies in Germany there are:

10 Chemical, Technological, Medical or Pharmaceutical firms.

4 Automotive Companies.

2 Banks.

2 Insurance Companies.

2 Personal and Home Care manufactures.

1 Steel Company.

1 Cement Producer.

This is Spain

Among the 35 major Spanish companies there are:

7 Banks.

6 Construction and infrastructure corporations.

2 Steel companies.

1 Pharmaceutical.

1 petrochemical.

1 Solar Power company.

1 Wind Power company.

Germany has a large number of firms that manufacture diverse products. Automotive, Chemical, Technological, Medical, and Pharmaceutical industries are big job creators. Those businesses need from very low-skilled level workers to very-highly educated employees. In other words, from assemblers and transporters to scientist. Besides, the large scientific community in Germany assures the country has very innovative top level firms.

The two main activities by the 35 major companies in Spain are banking services and construction. Precisely, the two industries most affected by the 2008 economic bubble.

Construction suddenly stopped after the bubble. This industry propelled Spain’s economic growth in the 2000s making around 10% of the GDP and employing 9% of the labor force in 2009. Construction is also a huge job creator that pushes other industries such as steel manufacturers. But Spain has over built infrastructures, buildings, and houses. In fact, Spain built more houses than Germany, Italy, and France together during the bubble. There is nothing else to be constructed. Therefore, one of the largest industries has halted its economic activity triggering massive layoffs. Now, unemployment is at pre-housing bubble levels (1994-1996). The jobless rate had decreased but once the bubble exploded, we see that Spaniards are at the same situation as when it started.

On the other hand, Spain has a crippled financial sector. Banks have accumulated numerous toxic assets from unpaid mortgages. Instead of depreciating the value of those properties to the current market prices, Spanish banks keep reporting in their balance sheets that the value of those assets is the price paid before the economic crisis in order to avoid reporting loses. But those prices are not fixed to the current. Consequently, nobody will invest in real estate keeping those toxic assets in stock having banks full of properties but short of liquidity.

Therefore, banks are not lending money. Despite the fact that the Spanish government bailed-out many of the cajas (savings banks), banks have used that money to pay the debts they had with other institutions instead of injecting money into the economy. Thus, there is no credit for individuals or companies. There is no fuel to start the engine.

Therefore, having the two main industries severely damaged has left the economy stagnant. Unlike Germany, there are no other industries that can carry the economy into a better scenario. The main problem of Spain is Spain itself. Until this country invests in different industries, unemployment will be an endemic disease in this nation.

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Kane Prior

My name is Kane Prior and I like to write about economic issues from around the World. I am a graduate from the University of Kent with a 2.1 degree in Business and Economics. I hope to use this blog to gain interest in myself and maybe lead to some potential career someday. If you want to contact me I am on Twitter (just click on the image) and if you have any writing opportunities for me, then please feel free to drop a message.

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